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UAE Warned of Rise in NPLs

Problem loans in the UAE’s banking sector are set to rise by the end of 2018, ratings agency Moody’s Investors Service warned, blaming “sluggish” economic growth seen this year.

The agency has forecast that non-performing loans could reach 5.5 or 6% of total gross loans next year, an increase from the 5.3% recorded in June 2017, Reuters reported.

This is at the higher end of the scale when compared to the UAE’s peers in the Persian Gulf Arab region (comprising Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman) where NPLs range between 1.6 and 6.3%, Moody’s said in a note issued on Monday.

While Moody’s has maintained its outlook for the country’s banking sector as “stable”, the agency said a high concentration of loans to government-related institutions and to the volatile real estate sector continues to pose risks to the quality of loans in the UAE.

It also warned of the level of exposure banks have to the construction and property sectors, industries that suffer from a higher-than-average historical delinquency level. This sector represented 19% of the banks’ loan books as of June 2017.

This increases to 25% of gross loans when personal loans for business purposes are included. Moody’s estimates that a proportion of these personal loans are likely to be used for some form of real-estate related purpose.

The agency also forecasted that delinquencies among retail and small- to medium-sized enterprises would increase, although overall corporate loan performance would remain “resilient”. Household loan performance would weaken due to job losses and employment uncertainty constraining the repayment capacity of borrowers, Moody’s said.

However, the agency has forecast an economic rebound in 2018, which could help the banking sector weather any worsening of their loan books. Moody’s has forecast that non-oil economic activity will boost the UAE’s real GDP growth to 3.2% next year, after a forecasted slowdown to 1.1% in 2017 and 3% in 2016.

Government spending in Dubai and economic activity in trade and financial services will help drive this growth, the report said, as will the construction of large infrastructure projects ahead of the 2020 World Expo in Dubai. The recovery in oil prices during 2017 will also support government spending.

This rebound will boost credit growth in the banking sector, which is forecast to rise by 5% in 2018 after a predicted lower growth rate of 2% in 2017, the agency said.

Capital levels will also remain “strong” over the next 12 to 18 months, which will provide a “substantial cushion” against softening loan performance, said Moody’s.